Junto

TXlaw - that report is junk. Here are my thought I put together tonight. As Mr. Market has taken a short-seller's research and made significant adjustments to Bank of America in the recent week, I see opportunity in the shares. Opportunity exists because Branch Hill Capital has significantly over-shot its research. Research slides here. Let's start with the basics: Stock Price (10/15 Close) $ 11.98 Book Value/Share (6/30 10-Q) $ 23.24 Tangible BV/Share (6/30 10-Q) $ 12.14 Tangible BV/Share (6/30 with CCB Value) $ 12.86 EPS Mean Analyst Est. 2010 (Yahoo Finance) $ 0.91 EPS (6/30 10-Q) Actual $ 0.55 2009 EPS $ (0.29) 2008 EPS $ 0.54 2007 EPS $ 3.29 At the recent closing price, BAC is trading at a discount of 1.32% to tangible book value, 6.84% to tangible book value after the inclusion of the China Construction Bank interest, and 48.45% of book value. The stock trades at a PE of 13 for 2010 Mean Estimates and 8 times 2011 estimates. This is the basic analysis. Trading at a discount to book and a low multiple to future earnings means a great deal doesn't it? However, the major issue weighing down the stock is the unforeseen risk with mortgage put backs required by GSEs, monoline insurers, and private label MBS. Branch Hill Capital Projects the following losses based on its own research coupled with Compass Point Research: GSE Monolines Private Labels Total Loss Projection 21.8 billion 7.2 billion $45 billion 74 Billion Put Back Projection 36.6 billion 12 billion Not provided Branch Hill fortunately provides its assumptions and rough analysis to provide the figures. Let's start with the Monolines because this is the easiest to counter given the recent 10-Q from BAC. Branch Hill uses a arbitrary multiple of 3 to estimate the ultimate put back claim from the Monolines based on the recent 10-Q. Let's go to the 10-Q regarding the $4 billion mentioned: At June 30, 2010, the unpaid principal balance of loans related to unresolved repurchase requests previously received from monolines was approximately $4.0 billion, including $2.3 billion that have been reviewed where it is believed a valid defect has not been identified which would constitute an actionable breach of representations and warranties and $1.7 billion that is in the process of review. At June 30, 2010, the unpaid principal balance of loans for which the monolines had requested loan files for review but for which no repurchase request has been received was approximately $9.8 billion So $2.3 billion of $4 billion were reviewed and it is believed there is not a defect which would indicate a breach of contract. This is an astounding 57.5% of the claims! Now there are another $9.8 billion underreview but no purchase request has been filed. It is not exactly clear the remaining $1.7 billion are valid claims, but needless to say taking a completely arbitrary multiple of 3 against the higher figure then assigning another arbitrary loss of 60% against this figure misleads the reader to believe higher losses can be expected. Moving onto the Private Label figure the loss projection is again misleading. Here is a link to a Compass Research Note dated August 16, 2010 that is referenced in the slides by Branch Hill. The link is a pdf document. Compass Research uses the lawsuit of FHLB San Francisco v. Credit Suisse Securities (USA) LLC, et al.) and makes the following indication: In the worst case scenario, we assume that the rescission requests identified in the FHLB suits are indicative of the total potential pool of loans that could be rescinded industry-wide. While we cannot opine on whether or not the suit’s rescission percentage will ultimately be proven accurate, we believe that the data set forth in each particular suit is substantial enough to establish a worst case scenario. This is likely a strench to extrapolate from the FHLB suits to the entire industry. It also does not provide any potential credit to the counter parties on their viewpoint on the documentation and exceptions. This underpinnes Branch Hill's calculation of losses. Unfortunately as much as I have dug online as an individual investor, I have not located any definitive data on what the success rate is on private label rescissions/put backs and/or the current rescission rate across financial institutions. Compass provides the following table in its research: Worst Case 2005 2006 2007 FHLB Recission Rate 43.2% 49.1% 54.5% Alt A Success Rate (1) 50.0% 60.0% 75.0% Alt A Severity Ratio (2) 50.0% 55.0% 60.0% Subprime RMBS Success Rate 80.0% 80.0% 80.0% Subprime RMBS Severity Ratio 50.0% 55.0% 65.0% (1) Higher % equals larger losses as firms are more successful on the ultimate recession of loans (2) Higher % equals larger losses as banks lose more from loans of the provided vintage So because they are subprime, it is assumed they will be worse than Alt-A, and therefore more likely to be successfully put back to the banks. The figures also reflect high recission rates to be applied across a large span of assets. So Compass/Branch Hill assumes that GSE's will put successfully put back 20% with a loss of 60% and in private label mortgages it will be nearly double in terms of success? I doubt this logic will hold true. Why would the underwriting be that much worse by the same lenders to reflect the material discrepancy? Furthermore, only $33 million has been submitted for recission on Private Label MBS. More will come, but $33 million is nothing when you compare it to Branch Hill's $45 billion loss figure. Moving to GSEs, reference Oppenheimer & Co.’s Chris Kotowski. As stated on Barrons.com: Moreover, Kotowski asserts, since there’s a delay of 12 to 20 months between the time a loan becomes delinquent and the time that Fannie or Freddie request a repurchase, it’s important that “problem flows,” meaning, new loans showing up as an issue, are actually declining. “The level of GSE put-back requests should have hit their peak/plateau somewhere between Q1 2010 and Q3.” Based on the total expected repurchases of Fannie and Freddie, $27 billion, and B of A’s share, B of A could be facing a total loss of $3.153 billion, Kotowski estimates. Read his research for further information. Regarding the loss assumptions, the S&P Case Shiller national average has lost 27.33% from the peak in Q2 2006 to Q2 2010. Even if you pad some numbers for costs of foreclosing, the properties did not lose 50% to 65% of their value plus any principal reduction received during the performing years of the loan. This is just silly. If they were land loans, I would understand the discount. I have looked and not located, but would love to see the hard data on what the actual loss has been. As it is getting late, the summary is this: * BAC is undervalued - I see $17 as an easy 12 month target * Branch Hill capital is pushing paper to benefit its disclosed short on the stock. The numbers do not add up and the assumptions within the report do not stand up to the facts. * BAC with current reserves of $3.9 billion is adequately protected in the near-term and has the earning capability to cover additional exposure in the long-term. Looking forward to the call and earnings on Tuesday. Long BAC.

CWH-B, formerly HRP-B, was called today at par of $25.00. Congrats to those who purchased back in 2008 & 2009. I am certainly glad to be one of them, just unfortunate it got called so soon...

leverage is a lot less if i remember correctly with Frontier compared to the Fairpoint transaction. I have family who are currently rolling up old line telcos and have found it very lucrative; although, along with integrations new revenue streams are constantly being looked at because of issue #1. Long-term business models will change but near term cash flows remain strong...

I have purchased a little KKR recently because of a similar reasoning and a sum of parts valuation on the firm.

If you are looking for yield in the current market environment, preferreds are still beneficial although the capital appreciation/upside of 2009 is no longer available. 2009 was an opportunity that doesn't come around often. In June/July, GS preferred provided a good upside/downside opportunity. I still own WFC-L, CWH (HRP) - B/C/D preferred, LXP preferred, and purchased GS-D a couple of months ago at $18-19.

AMEN!

Just because he has nice cars and house doesn't not indicate he is not prudent with money. A pretty big leap in my opinion. I am not saying they are good investments but I think you are exaggerating. The guy makes over $900,000 per year and we have no insight into his personal financial statement... This is definitely an egregious compensation agreement given his historical position on executive compensation. I am going to wait and watch how this plays out.

Hi Eric, I will post my thoughts in the next week or so. I am tied up with work and the upcoming holiday.

A lot of insurance investors on this board...any following in this stock? Just starting to dig through the 10-Ks. Came up on a recent stock screen. Initial thoughts on long-term prospects look good at the current pricing levels.

That makes two of us. I don't see it either nor did it come up in a search on the site.

I own a very small position in it. Short-term hold while yield curve is steep. I would recommend looking at ANH as well. This REIT is trading at less than book with a company buy back in place. Overall small positions and clearly a bet on the yield curve. My personal opinion, derived from my job as a commercial lender, is that the economy remains weak and that the government is going to be slow in increasing rates. This should allow for another 12 months of solid dividends.

http://alephblog.com/2010/03/02/moat-float-growth/ Good little article.

Strong buy for me. Bought in at 4.46 and 4.50. Looking to add more, but waiting for the most recent 10-Q. Here is a rough outline of thesis. I don't have time right now to post mine so I am referring to anothers: http://seekingalpha.com/article/189135-labranche-co-a-low-valued-stock-with-a-great-balance-sheet?source=yahoo

Hi Packer, I am in LXP pretty heavy at $4-$4.90. Still upside potential, but it is now nearing the lower end of the conservative value range.

nodnub, I would agree that there is no clear rationale that Covestor, as an example, will be able to support top ranking model managers that can out perform the market year in and year out. Out-performance is always a target and will bring the investors to the table but I doubt any of these firms would make the claim that this is a major strength of their business model. The major benefit of their service as I see it is the transparency they provide their investors at CVIM. Very few mutual funds allow you to see how your money is invested 100% of the time. CVIM provides this transparency as well as more control over how your funds are invested through the different managers by allowing the investors to design risk tolerances among other items. This is certainly a beta service and will only get better with more managers and longer track records.

I have been using it since June 2007. The returns are calculated based on the day you join the website moving forward. More specifically from the website, "Covestor uses the GIPS (Global Investment Performance Standards) as a guideline for calculating the performance and risk measurements of individual portfolios. GIPS are the standard measure of accountability and reporting for leading investment management companies worldwide, designed for comparative measurement of the performance of portfolio managers. Covestor members are not fully GIPS compliant as they are not regulated investment managers." The people at Covestor have always been upfront and easy to deal with. I am also one of the first "model managers" and am working through the Covestor Investor Management (CV.IM) system (http://cv.im/models/profile/andy-schornack) with an industry specific focus portfolio. Overall, I highly encourage those of you to take a look at the website and information. The principals are more than willing to answer questions as seen on a blog post at avc.com (http://www.avc.com/a_vc/2009/07/cvim-a-new-kind-of-investment-management-account.html). There are no liars or said to be all stars without the results to back it up. Full transparency on the trades and how the returns are calculated due to the direct link to your trading account. Another website for those of you who are interested is cakefinancial.com. This site will pull your trades/history from your account going back to your accounts opening.

You forgot over-priced...

http://www.valuestockplus.net/seth-klarman has a copy you can download...

I am curious to see if anyone on the board has done any research into LXP, Lexington Realty Trust (REIT). Through my analysis it is trading at a significant discount to value. Book value less non-controlling investments and other intangibles at 6/30 I estimated at $6.25. The FFO is projected at $1.29-1.34 for 2009 (net of one time charges). It is currently trading at $4.14. Some analysis (not mine but similar viewpoints). I will try to post mine when I have a bit more time than tonight. I just wanted to get the thread going. http://seekingalpha.com/article/137818-lexington-realty-trust-a-solid-reit-with-huge-potential http://messages.finance.yahoo.com/Business_%26_Finance/Investments/Stocks_%28A_to_Z%29/Stocks_L/threadview?bn=27874&tid=1988&mid=2020 (tcorcoran40 has been providing fairly good analysis on his own right on the Yahoo forum but has a bit of an attitude).

interesting...Biglari through SNS takes a 9.9% position in the company...

http://www.arbitrageview.com/riskarb.htm http://www.mergerinvesting.com/pendingmergers Two sites I typically view to get some ideas for further research.

I guess it depends on how you calculate. My 401k's got nailed but my personal investments did okay through the slump. Here are the stats for the investment accounts (based on quicken): 2008: -17.54% 2009 YTD: 92.48% I made a big push into preferred's in early 2009 which drove a lot of this year's returns. In mid-2008 to the early of 2009, I modified my investment style to momentum/range bound investing in a select number of stocks which limited my downside. I still held a core portfolio of long-term investments through the market drop and rebound. I don't short stocks so I missed out on a lot of opportunities but I do focus on financial and real estate related investments so overall I have been very happy with my returns.

I will jump in on the preferred conversation. This will be a quick brief. As per my posting back on March 25, 2009 I held the following preferreds in my portfolio: CTZPRA Citizens Funding (Preferred) WFCPRL Wells Fargo & Co. (Preferred) HRPPRB HRPT Properties Trust (Preferred) LNCPRG Lincoln National Corporation (Preferred) AIVPRY Apartment Investment Mgt Company (Preferred) HRPPRD HRPT Properties Trust PRFD 'D' (Preferred) JPMPRY JP Morgan Chase Cap XI (Preferred) ORHPRA Odyssey Holdings PFD A (Preferred) I have since exited a number of them and entered a new position, so this is my current portfolio. Gross dollars invested between the two is about a third of where I was at before: WFCPRL Wells Fargo & Co. (Preferred) HRPPRB HRPT Properties Trust (Preferred) HRPPRD HRPT Properties Trust PRFD 'D' (Preferred) LXPPRD Lexington Realty Trust PRFD 'D' I think WFC continues to perform well and the return moving forward at 8.52% on the preferred I believe is still a very good risk/return reward situation. WFC's CEO, John Stumpf was quoted in the Wall Street Journal this week indicating that they still have $30 billion in unused writedowns from the Wachovia merger and that the Wachovia merger is on track. Earnings continue to be realized given the low cost of deposits in the current interest rate environment. General economic conditions are also stabilizing with Bernanke indicating that we may have exited the recession although the job market will remain week. I also own WFC common shares. HRP is a REIT that I believe is on solid footing. The balance sheet represents no maturities on debt until 2011, not detrimental leverage, and with the HRP-B preferred yielding 9.68% and the HRP-D yielding 9.16% I believe they are also good holdings in my stock portfolio. The spin-off of GOV allowed the firm to better enhance their balance sheet and position them well to take advantage of the CRE opportunities coming up because of the CMBS market. Given estimates, the firm has roughly a 6X coverage on the preferred payouts. This givens be comfort that these dividends will be coming for the foreseeable future. LXP is a REIT where I appreciate the management and what they have done throughout the downturn. Although the common stock pays a split stock and cash dividend, the management has used these extra funds to reposition the balance sheet by buying its own debt at a discount. It has also used funds from selling properties at good cap rates to buy debt at even larger discounts; thereby, having a positive spread for the common shareholders as well as better comfort for the preferred shareholders. The company has ample cash flow to service the preferred dividends, around 7X. Overall, I am very comfortable with my current positions. I definitely sold out of some of my earlier positions too soon, but I also hit some homeruns (WFC-L and CTZ-A for example).

Packer, This seems a bit riskier than the preferred stocks I have been investing in. I usually focus on firms that are paying the preferred and yields were out of line with the value and the ability of the company to service preferred payments. For instance, and you can reference the preferred stocks posting from earlier this year when there was a clear imbalance in the portfolios of these firms. This waas a great discussion that lead me to make a lot of money. http://cornerofberkshireandfairfax.ca/forum/index.php?topic=159.0 I think in your instance you have to look at what the overall face value + accruing interest due is on the preferred as a percentage of your estimated equity value stabilized. Then adjust accordingly for the returns.

The key telling is how many people intend to go delinquent. This is a garbage stat and to me doesn't say anything. A vast/super majority of people will continue to pay their mortgages because prices will rebound and most people don't buy houses for the next year but for the next ten years.